Canada: October GDP Ensures 2023 Ends, not with a Bang, But a Whimper

While October real GDP surprised to the downside, the broad-based weakness is just as notable. In goods-producing sectors, manufacturing output shrunk for the fourth time in five months while construction slumped following three consecutive monthly gains. But it’s not all bad news, as the remaining goods-producing sectors moved higher after struggling for months. In services-producing sectors there was meaningful weakness but much of it was expected. Notably, while the impact of the St. Lawrence Seaway strike showed up in transportation and warehousing, it was likely reflected in some of the lacklustre performance in other sectors as well.

Looking ahead, Statistics Canada’s flash estimate for November is pointing to 0.1% growth in real GDP by industry (graph 1). Assuming it is correct and December is unchanged, real GDP by industry would advance by 0.5% annualized in Q4 2023. In contrast, we’re tracking growth in real GDP by expenditure closer to 0.3% in the fourth quarter. That’s half the Bank of Canada’s recent forecast of 0.8% for Q4 real GDP growth published in its October Monetary Policy Report. And this despite Canada’s population growing at the fastest pace since the 1950s (graph 2).

No matter how you slice it, recent economic indicators have supported our call that the Bank of Canada’s hiking cycle is over. For instance, both real GDP growth and inflation are coming in below the Bank’s latest forecast. And the unemployment rate has gradually tracked higher, as population gains outpace hiring. So, with new projections in hand at the next meeting, the Bank of Canada will likely soften its tone on the need for further rate hikes. Indeed, Governor Macklem has acknowledged that the first half of 2024 will be challenging for the Canadian economy. We anticipate a recession at the start of next year (see our most recent Economic and Financial Outlook External link. This link will open in a new window. for more details). Taken together, this reinforces our view that rate cuts will begin by mid-2024.